Re: Wellgreen Valuation and a War Story from the PastIn the mid 1980s, when I was just starting out in the stock market, I latched on to a small cap stock that turned out to be a big winner. The company's name was Diagnostek.
They were involved in the early development and distribution of MRI medical diagnostic equipment. The company was started by a talented group of doctors... it had no debt.... they seemed to have a product and business model that was going to make the cash register ring in a major way.
I accumulated it through 1986 and 1987 at prices of $1 to $2 a share. In October 1987 the stock market crashed and I remember that the stock was crushed that day to around .60 cents.
Looking back, I didn't know a hell of a lot. But I screwed up the courage to buy all I could. On the day of the crash, my recollection was that I bought 5000 shares at around .60 -- $3000. And it was a lot of money to me then.
In 1988, the market began to recover some, though I remember it largely as a sideways consolidation. Early in the year, the stock climbed back above $1.00.
In April of that year I got married (we celebrated our 26th Wedding Anniversary this past April). During our honeymoon, we were on a cruise in Hawaii. No internet of course and no Financial News Network (the predecessor to CNBC) on the ship. One day, I spot a copy of the Wall Street Journal on board.
In those days, on the second page of the second section, they used to list all the companies that were mentioned in that edition --so you could quickly scan whether there was news on a stock that you were interested in. Diagnostek was so tiny that it was never mentioned, but I would check, just the same.
Guess what? That day, there was an article about the company. They had just secured a major licensing agreement and the stock had taken off. To make a long story short, over time the stock worked its way into the teens and eventually went through a merger. Major home run, especially for someone early in their investment life.
Over the years, I had another home run with a biotech stock named Ribozyme. Had another with a technology stock named Sigma Designs. Although in both those cases, it was necessary to scale out during the good times to capture the out-sized gains, because the stock prices thereafter collapsed back to much lower levels.
Why am I taking this trip down memory lane? Because I can remember another stock I have owned, which was mispriced relative to its underlying value. I would not be at all surprised if this stock ultimately replaces Diagnostek as my all time investment.
Understand that I believe in diversification -- not only inside a stock portfolio, but with regard to investment in general. There is a place for real estate, there is a place for physical metals, there is a place for cash. I am overweight the stock but within reason. I do not counsel building a concentrated position in anything.
That said, I think the numbers are more than compelling here. Having listened to the bullish case for a zillion "story stocks" over the years, I am naturally skeptical. My goal is to try to err on the side of caution when looking at the numbers. For that reason, I am more likely to consider the lower end of the estimates for Wellgreen's resource estimates, production costs, etc. when trying to build a case for the stock. Better to do that and then be pleasantly surprised if you get upside from there.
And that is the amazing thing. Even when you run the numbers conservatively, the stock appears to be insanely undervalued. The prospective cash flows, relative to the current market cap, are just silly. Even at a smaller sized operation.
For example, 15,000 tpd for even 300 days per year, would equate to 4,500,000 tons. If you had a gross margin of $30 a ton, that produces cash flow of $135 million. Compare that to the current market cap. Compare that to what gross earnings per share would look like vs. the fully diluted share count.
And then realize that we might considerly exceed that level of production and/or gross margin (as eodway has penciled out). Whether you look at the prospective cash flows from the operating mine or place a value on the undeveloped ounces in the ground -- the market appears to be giving this one away.
Given the depths of the bear market in junior mining stocks, there are many high quality speculations available to us. I am holding a diversified group of about 50 mining stocks right now. I like the intermediate to longer-term prospects for all of them. But none more than Wellgreen.
Again, I preach diversification as one never knows what left field event might emerge between now and the end of the rainbow. I am not a registered investment advisor. Please perform the necessary due diligence Good luck everybody.